beneficiary mistake

Don’t Make This Costly IRA Beneficiary Mistake

A beneficiary mistake on an IRA can cost you thousands…

You’ve done your estate planning. You’ve put assets into a trust, that distributes to your heirs upon you and your spouse’s death. You and your spouse are the trustees and instructions are clear for the backup trustee. Most of your assets will avoid probate. You also took care of any estate tax issues with trust and insurance planning. Furthermore, any heirs that can’t handle the influx of wealth will be restricted for their own benefit according to your trust. Nice work and congratulations! You are ahead of millions of people when it comes to estate planning.

Annuity rollover options the laymans guide

But THIS Beneficiary Mistake Will Put You Behind!

But wait, you made your trust the beneficiary of your IRA’s and 401ks? Why?  Oh so that the money would follow the rules of the trust like your other assets and split to the kids the way you planned? That’s a nice thought but will  the IRA’s be cashed out and dumped into the trust bank account? You’re not sure?

Let me ask you this – would you like your grand-kids (or whoever the heir is) to inherit the IRA without paying taxes on the balance right away and defer taxes for many years to come? Or would you like a big chunk of the money you leave to your heirs to go to the IRS and their friends at the US Treasury? If you prefer the money stay with your chosen heirs, then follow IRA expert Ed Slott’s advice:

beneficiary mistake IRA
Ed Slott CPA – teacher to advisors

“NEVER, NEVER, NEVER move your IRA assets into the trust or retitle your IRA into the name of the trust.”

Why does Ed Slott say this? Because of the risk that in leaving IRA assets to the trust, the trustee (remember you’re dead so you can’t speak up, at least through channels we’re aware of) cashes out the IRA, deposits the money into a trust bank account and then has to pay those taxes (what’s your bracket?) before distributing the funds to the heirs.

In this case, it may* make sense to leave IRA/Qualified Plans money directly to heirs so that they can easily receive the money pre-tax and ‘stretch” the funds (stretching works different if you are over or under age 70 1/2 when you die – see IRS publication 590). That way the heirs can continue to grow the money pre-tax and control more when and how much taxes they pay. If you are wise enough to have saved a significant sum in an IRA, I’m sure I don’t need to show you the cliche chart of how much more your money grows pre-tax vs taxed, and this benefit would extend to your heirs too.

If you have an IRA, and you are considering using a trust for estate planning**, you need to work with someone who understands how IRA’s work with trusts. You need to understand beneficiary rules too. Rules which have changed over the past few years. If you’d like to home study beneficiary mistakes and beneficiary choices, I suggest you start by reading the following:

IRS Publication 590 – the definitive IRA resource from the IRS

Here’s a primer on trusts from

Ed Slott Explains More on the Problem of IRA beneficiaries being Trusts

Help with IRA Beneficiary Decisions and avoiding a beneficiary mistake

If you’d like some help, feel free to call us at 888-278-9433. Or schedule a phone appointment via our online scheduling system and we can discuss your situation and see what might make sense for you. Thanks for reading.

*It may make sense – but please don’t make major (or minor) changes to your estate plan without talking to your advisor – consult a qualified estate planner/estate planning attorney. Ok?

**Also remember on another note, only individuals can own IRA’s (not trusts) so making a trust an IRA owner before you die could create serious tax issues.

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